Apple CEO Tim Cook Says He Isn't Terrified of WeChat, but How Do You Explain the Drop in China Sales
Apple's (AAPL) - Get Report blowout second quarter earnings report was marred by one flaw: another quarter of double-digit revenue decline in Greater China.
China boasts the title of the world's biggest smartphone market, yet Apple's revenue in the country declined by 10% in the past quarter, slightly better than the 14% drop it saw in the previous quarter.
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On the earnings call, Apple CEO Tim Cook tried to convince analysts that WeChat wasn't negatively impacting its iPhone business in China. WeChat is the social networked owned by China-based Tencent (TCEHY) that has nearly one billion active users. The app has essentially become an operating system in China because it allows users to pay bills, transfer money, order takeout, download games, message other users and more, the Wall Street Journal reported.
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Cook claimed that the widespread use of WeChat in China just means Apple has a lot more room to grow in the country. "In terms of WeChat, the way I look at this is, because iOS share is not nearly a majority of the market in China, the fact that a lot of people use that - it makes the switching opportunity even greater," he claimed.
In fact, Tencent has actually helped implement iOS features into their apps, Cook continued. "We're looking forward to working with them even more to build even greater experiences for our mutual users in China," he concluded.
But Oppenheimer analyst Andrew Uerkwitz didn't buy Cook's comments. In a note to investors on Wednesday morning, he wrote that the question about the risk of WeChat was the best question asked during the earnings call, but that he disagreed with Cook's stance. "We see flaws in management's argument and we believe the popularity of WeChat is why Apple's share in China stays capped," he explained.
Analysts and investors in the U.S. have a hard time understanding just how deeply WeChat has penetrated China because, in the U.S., smartphone users are typically either Android users or iOS users. Switching from one OS to the other is typically a big decision because its cumbersome. But in China, switching is easy because WeChat is seen as an operating system, and it's available on both iOS and Android.
Apple isn't the only one being edged out of China by the power of WeChat. LinkedIn, a unit of Microsoft (MSFT) - Get Report , created an app called Chitu that was meant to draw in hundreds of millions of users but it never made much progress due to WeChat, the New York Times reported. In China, people prefer to do professional networking in a more private space, like WeChat's app allows with both individual and group conversations. Former LinkedIn employees told the Times that pushing Chitu on China professionals seemed futile because everyone was already using WeChat and happy with it.
"The root of the problem is that Chinese do not need a social platform for work," Xu Mengya, a former marketing employee at LinkedIn China, told the Times. "It is a fact in China that all social activities related to work are on WeChat."
It's tempting to say that maybe China doesn't need Apple's iPhone either. The China smartphone market is currently dominated by Chinese firms Huawei and BBK Electronics, which owns the Oppo and Vivo brands, according to global market intelligence firm IDC. For 2016, Oppo came in first place for smartphone sales in China, followed by Huawei and then Vivo. Apple came in fourth place with almost half the shipment volume of Oppo.
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